SEC is weighing disclosure rule for companies

A loose coalition of Democratic elected officials, shareholder activists and pension funds has flooded the Securities and Exchange Commission with calls to require publicly traded corporations to disclose to shareholders all of their political donations, a move that could transform the growing world of secret campaign spending.

SEC officials have indicated that they could propose a new disclosure rule by the end of April, setting up a major battle with business groups that oppose the proposal and are preparing for a fierce counterattack if the agency's staff moves ahead. Two SEC commissioners have taken the unusual step of weighing in already, with Daniel Gallagher, a Republican, saying in a speech that the commission had been "led astray" by "politically charged issues."

A petition to the SEC asking it to issue the rule has already garnered close to half a million comments, far more than any petition or rule in the agency's history, with the vast majority in favor of it. While relatively few petitions result in action by the SEC, the commission staff filed a notice late last year indicating that it was considering recommending a rule.

In response to the growing pressure, House Republicans introduced legislation last Thursday that would make it illegal for the commission to issue any political disclosure regulations applying to companies under its jurisdiction. Earlier this month, the leaders of three of Washington's most powerful trade associations — the U.S. Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable — issued a rare joint letter to the chief executives of Fortune 200 companies, encouraging them to stand against proxy resolutions and other proposals from shareholder activists demanding more disclosure of political spending.

Tax-exempt groups and trade associations spent hundreds of millions of dollars on political advertising during 2012 elections, but they are not required to disclose their donors. Evidence has mounted that a significant portion of the money came from companies seeking to intervene in campaigns without fear of offending their customers or their shareholders — or the lawmakers they target for defeat. The debate over disclosure poses an early test for Mary Jo White, who was confirmed as the SEC's chairwoman this month. A new rule would pull the commission into a fierce political battle just as White and her staff will be wrangling with lawmakers and lobbyists over carrying out legislation imposing new rules on financial institutions.

"We're keeping an eye on her," Steve Lonegan, an official with Americans for Prosperity, the conservative political organization founded by Charles and David Koch that has urged the SEC to drop the issue. "My feeling is they are not going to want to deal with this," Lonegan added. "The SEC has to deal with its own problems and with what they're actually authorized to be doing."

While campaign finance regulations are usually the province of the Federal Election Commission, advocates for the new proposal have pressured the SEC to issue its own disclosure rule. They argue that shareholders should be able to evaluate business executives' oversight of company resources and that SEC regulations already require disclosure of similar information such as executive compensation.

"Shareholders have been demanding this information for some time" said Robert J. Jackson Jr., a law professor at Columbia University who helped write the original petition to the SEC. "It's a basic precept of American securities law that shareholders should be given the information they need to evaluate their companies." The California Public Employees' Retirement System, the AFL-CIO, Bill de Blasio, the New York City public advocate, and others have lobbied the SEC in support of the petition.

Opponents argue that the agency does not have the authority or expertise to issue regulations about political spending, and that a disclosure rule would infringe on companies' free speech rights — and damage shareholder value — by exposing them to criticism and attack from political opponents.

"The Chamber believes that the funds expended by publicly traded companies for political and trade association engagement are immaterial to the company's bottom line," said Blair Holmes, a spokeswoman for the business group, who added that the advocates' "apparent goal is to silence the business community by creating an atmosphere of intimidation under the cover of investor protection."

White's confirmation means the five-member commission now has three Democratic appointees and two Republicans. Observers on both sides expect White to have the deciding vote on any disclosure rule. White, a longtime federal prosecutor whose nomination drew some criticism because of her work as a lawyer for banks after the financial crisis, declined to be interviewed for this article.

While both liberal and conservative tax-exempt groups were active during the 2012 election — spending at least $300 million, according to the Center for Responsive Politics, a watchdog group — the biggest and best-financed groups have tended to back Republicans.

Reaction to the SEC petition has broken down accordingly. Democratic lawmakers, including Sen. Robert Menendez of New Jersey and Rep. Chris Van Hollen of Maryland, have urged the SEC to move forward, while Republicans and conservative groups have denounced the petition as an invitation to regulatory overreach.

Rep. Darrell Issa, R-Calif., who leads the House government oversight committee, has demanded copies of any correspondence between the commission and outside parties relating to the proposed rule, along with details on how many hours commission staff had spent working on it.

On Thursday, in a bid to block any new rule, House Republicans introduced legislation that would make it illegal for the agency to issue any political disclosure regulations applying to companies under its jurisdiction.

Rep. Scott Garrett, R-N.J., who is chairman of the House subcommittee that oversees the SEC, said he had moved to co-sponsor the new legislation after hearing complaints about the proposed disclosure rule from trade groups and businesses in his district.

"The role of the SEC is investor protection, not to engage in a political foray," he said.

Any rule issued by the SEC would not touch on political contributions by individuals or from privately held companies, which are the chief sources of contributions to "super PACs," registered political committees that can accept and spend unlimited amounts of money on campaigns. But few public corporations contribute to super PACs, in part because political action committees are regulated by the Federal Election Commission and subject to stringent disclosure rules.

Virtually no public corporations have spent their own money directly in political campaigns, a practice now permitted under the Supreme Court's Citizens United decision. And corporations remain banned from giving money directly to federal candidates.

Instead, some large companies donate money to trade associations and other tax-exempt groups, like the U.S. Chamber of Commerce or Crossroads Grassroots Policy Strategies, founded by Karl Rove, which in turn mount huge advertising campaigns on businesses' behalf. Because those groups assert their spending to be educational in nature, they are exempt from most of the donor disclosure requirements that apply to super PACs, political parties and candidates.

The trade associations lining up in opposition to the rule amount to a roll call of the most politically influential — and highly regulated — industries in the country. They include the American Gaming Association, the National Retail Federation and the National Mining Association.

Opponents said they believed the main purpose of the petition was not to protect shareholders, but to dry up sources of money for pro-business political groups.

"It's about outing donors and scaring them into not giving to political groups that they're opposed to," said Phil Kerpen of American Commitment, a tax-exempt group that spent more than $3 million last year on advertisements criticizing Democratic candidates for Senate.

Legislation in Congress to expand federal election laws to require more disclosure of tax-exempt groups has met with little success, and the Internal Revenue Service has largely remained silent on demands from Democrats and watchdog groups to examine whether any of the organizations are violating tax laws that limit their election spending. Advocates for more disclosure have also waged scores of shareholder proxy fights seeking to force companies to provide information on political disclosure, almost all of which have failed.

So the advocates have sought to advance their cause through state regulatory actions, lawsuits and public pressure to persuade companies to disclose their political spending voluntarily.

In seeking greater disclosure to shareholders, many of the advocates are citing an unlikely source: the Supreme Court's decision in Citizens United, written by Justice Anthony M. Kennedy. In clearing the way for unlimited corporate expenditures in campaigns, Kennedy suggested that "shareholder objections raised through the procedures of corporate democracy" could provide accountability for the new political powers.

"I think the SEC staff is very sympathetic to the petition itself, and a lot of the comments have referenced Justice Kennedy's opinion in Citizens United," said Karl J. Sandstrom, counsel to the Center for Political Accountability, which advocates transparency in corporate political spending. "But they have so much on their plate, they have to decide what's going to come first," he added.

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